My wife and I have typically had a 3-6 month emergency fund. To add some perspective, we spend around 3-5k on any given month. When it is 5k, it is usually due to tuition for my wife and extra payments to the mortgage. MyMoneyWizard explains how having that large of an emergency fund can wreak havoc on your retirement due to it’s huge opportunity cost.

We usually have around 8-10k cash sitting around. DOING NOTHING.

This has always bothered me but I didn’t know what to do about it. I finally have come up with a plan of action, again, thanks to MyMoneyWizard. In 2012 and 2013 I invested the maximum amount possible into a Roth IRA. I contributed 11k in those two years, and today it has grown to 14k.

What I have found, and you can read for yourself here, is that “you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.”

So that 11k I contributed can be pulled anytime I want without consequence. That’s almost a 4 month emergency fund. All I have to do is stick another 5.5k in there and I would have almost a 6 month emergency fund. I will always have 1-2 months income in my normal every day savings and checking account. Together with my Roth IRA, we will be able to have a 8 month emergency fund, of which most will be invested and working for me.

Conclusion

Consider the opportunity cost you are subject to with your current emergency. Can this money be deployed some other way to minimize the negative affects on your retirement? There may be an easy 1% gain to be had.